Dealing With Property Tax in America

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US Tax Overview

The following information is provided by Property Tax International and is intended as a reference guide only.

The Inland Revenue Service or IRS tax non-resident property owners on their US sources of income only and are liable to a number of taxes outlined below. The US imposes a number of criteria that determines when a non-resident becomes resident for taxation purposes.

The following taxes are payable when purchasing a property in the US:

At present there are no restrictions on foreigners buying property in the USA Purchase costs vary from 3% to 5% of the property purchase price.

US Real Estate Taxes – each US State can impose their own real estate tax rates.

US Property Taxes – are based on the fair market value of the property. The recent market conditions have opened up wide spread debate on the practice of imposing a ‘fair market price’ given the recent surge in distressed and foreclosures hitting the market. Some States will divide the property tax into two sections: 1) buildings and 2) land while others will impose one inclusive tax rate per property.

US Tax Identification Number (ITIN):

Non-residents must apply for an Individual Taxpayers Identification Number (ITIN) if they do not hold a Social Security Number (SSN). An ITIN application requires the applicants passport to be authenticated before a US Notary (either privately or at a US Embassy) or by a Certified Acceptance Agent.

NB: Property Tax International provide ITIN applications through a Certified Acceptance Agent removing the need for the applicant to make an appointment with their nearest US Embassy. Contact PTI for more information.

The following ongoing property taxes are payable in the US:

US Income Taxes – Rental income generated by a non-resident in the US must be divided into one of two categories:

  • Income effectively connected with a trade or business in the US and
  • Income not effectively connected with a trade or business in the United States
  • Income which is not effectively connected with a business or trade is taxed at flat rate of 30% whereas
    effectively connected income is taxed on a scaled rate basis dependent on the level of income with allowable
  • Two methods of taxation are available when rental income is received in the US:
  • Cash basis method – expenses are deducted as they are received
  • Accrual method – income is reported as and when it arises as opposed to when it was actually received
    and expenses declared as they occur rather than when they were paid.

US Capital Gains Tax

Non-residents are liable to capital gains tax on the gain made from the sale of a property after allowable deductions. For properties held for more than one year a lower CGT rate applies.

The long-term CGT rate was reduced to 15% in 2003, or to 5% for individuals in the lowest two income tax brackets. Short-term capital gains are taxed at the ordinary income tax rate. The reduced 15% CGT was due to expire in 2008 but was extended until 2010. It is expected that the rates will revert back to pre 2003 rates where CGT was typically 20%. There is a considerable speculation about what will happen to the US CGT rate in 2011 given the current economic conditions in the US.

Selling Process

The buyer of a property retains 10% from the agreed sale price as a withholding tax which is paid over to the IRS to cover the sellers' tax obligations.

The seller submits a balancing statement to determine if there was an overpayment in which case a tax refund would be due.

US Gift Tax

When a property is gifted to a family member, associate or friend a gift tax may apply.

US Estate Tax

A deceased person’s estate may be liable to an estate tax payable on the gross value of the estate after allowable deductions.

US Tax Filing Deadline – The deadline for filing an annual US tax return is the 15th of April – declaration applies to income received in the previous calendar year. The IRS will allow for extensions under certain conditions. Non-resident property owners with rental income not effectively connected with a trade or business in the U.S. will receive an extension until the 15th of June to submit their annual tax return.

Property Tax International specialise in the preparation and filing of US tax returns. We ensure your property’s profit potential is maximised by minimising your tax liability.

Worldwide Income

Individuals are generally required to declare their worldwide income within their annual resident income tax return. The USA has a double tax treaty with a substantial number of countries around the world. Most double tax treaties provide relief for taxes paid in one country against tax due on the same income in the taxpayer’s tax resident country. Property Tax International strongly advise that you consult with the tax authorities in your home country to determine if your resident tax country has a Double Tax Treaty in place and what income is covered under the agreement.

While Property Tax International Limited makes every effort to ensure that the information contained herein is accurate, we take no responsibility or liability for any inaccurate, delayed or incomplete information, nor for any actions taken in reliance thereon. The information provided above is intended as a guide only.

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